Tuesday, October 10, 2017

On Richard Thaler Receiving The Nobel Prize

This is a Sveriges Bank Prize in Economic Science in Memory of Alfred Nobel that I should approve of unequivocally, and I do approve of it. Dick Thaler has long been known to be on the list of likely recipients since at least when Daniel Kahneman shared it with Vernon Smith back in 2002, although I sort of thought the award just a few years ago for Robert Shiller would put Thaler's off a bit. Nevertheless, I approve of behavioral economics, so I was mistaken not see another award being given for it this soon, and with Thaler clearly a deserving and top candidate for it.

Indeed, I am the founding editor-in-chief of a journal called the Review of Behavioral Economics (ROBE), and back between 2001-2010 I edited the Journal of Behavioral Economics and Organization (JEBO). One of Thaler's most important papers back in 1980, his fourth most cited, "The Pure Theory of Consumer Choice," in which he introduced the concept of mental accounting, the first item cited by the Nobel committee in announcing his award, and the paper that I know he long considered the one that would get him the prize (which he long expected to receive), was the second paper ever published in JEBO, which should make me even more pleased. Indeed, I recognize that there is an important element of justice in his prize given that he "wandered in the wilderness" for many years, publishing in oddball journals such as JEBO in its beginning and Marketing Science and other such, until much later when his ideas became more accepted, and he finally began hitting the top journals. So, he deserves credit for struggling with ideas that were not accepted and helping to make them become accepted, such as through his column in the Journal of Economic Perspectives on "economic anomalies" from 1987-1990, with some people saying he is the first person to get a Nobel for having a column in the JEP, not entirely false that observation.

So why am I not jumping up and down as much as I probably should be and might be? Maybe for me this is like the prize for Paul Krugman, which I also think was deserved, but which I thought should have been shared with others. I think that is kind of what I am thinking, although I recognize that there is a fairly long list of people who might be the others sharing, with such figures as Camerer, Rabin, Loewenstein, Fehr, Gintis, List, and more as possibilities. It is not obvious which of these should be pushed forward to share it with him now. Indeed, if one looks at Google Scholar citations, one finds him somewhat ahead of all those, with over 110,000, while several of those have around 80,000 and none of them more than that. So, they are not far behind, but they are behind, and it is not obvious again, which of them should be pushed ahead of the others.

In this regard, this prize may resemble that for Jean Tirole. At the time many other names were pushed forward as perhaps deserving to share it with him, I shall not reproduce it, but, as with this one, the list was long, and it was not obvious which of those should be pushed forward. And, curiously, Tirole's Google Scholar citations are about as numerous as Thaler's, and he was also clearly ahead of this other batch, many of whom were bunched together. So, maybe I should just stop second guessing this one and simply be pleased that behavioral economics is again getting recognition, and that one who long struggled "in the wilderness" with many good and original ideas has indeed received it.

Addendum, 10/10: I think I know part of what has me bothered. It is much of the poorly informed commentary about this prize, especially claims that seem to suggest that Thaler along with Kahneman and Tversky invented or "fathered" behavioral economics, a view that has been enhanced by Kahnemans's own public comments. When Vernon Smith, "father of experimental economics," shared the prize with Kahneman in 2002, many were worked up that Charlie Plott did not share it, but the Nobel committee made it clear the missing man was the then already dead Amos Tversky, with in effect Thaler another missing man. So, he has clearly been way up on the list. What he has done has probably succeeded both through JEP and his Nudge book and his public policy work and appearance in a movie, convinced lots of people that behavioral econ should be taken seriously. That is certainly important, but being a good publicist is not the same thing as inventing, although he has been respoinsible for many new ideas in behavioral econ.

So, in 1978, the year before Thaler met Kahneman and Tversky to supposedly "father" behavioral econ, Herbert Simon received the Nobel for discovering "bounded rationality." He also coined the term "behavioral economics," and given its then still unacceptability, his award was criticized by many economists, especially some at Chicago such as George Stigler. Even those at MIT did not like it and continued with their usual fully rational homo economicus models, even if they were less loud about criticizing the award to Simon, who had died by the time Kahneman and Vernon Smith got their prize in 2002. So, Simon should be viewed as the "father" of modern behavioral economics, although many earlier economists, including Keynes, but also many classicals, expressed and discussed what we now view as behavioral economics ideas. An early classic of the view, now faddishly cited by many behavioral economists (and written about at length by Vernon Smith) is the excellent Theory of Moral Sentiments by Adam Smith, which went into three editions, and which he considered to be his most important work, well ahead of his more orthodox Wealth of Nations.

Economics is a failed science and because of this the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is an absurdity ― or worse.#1 The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.

Today’s economics is nothing but the pluralism of provably false theories or, in Feynman’s words, cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”#2

What economists have not realized until this day is that economics is NOT a science of behavior,#3, #4 Behavioral Economics from Adam Smith’s Theory of Moral Sentiment, to homo economicus, to bounded rationality, to Richard Thaler’s nudge is not economics at all but the very subject matter of sociology, psychology, anthropology, Political Science, history, etcetera.#5 The subject matter of economics is the economic system.

The lethal defect of economics is that it is microfounded, i.e. based on behavioral axioms. Now it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the second-guessing of Human Nature/motives/behavior/action to the explanation of how the economic system works.

After 200+ years of behavioral economics, economists still have no idea of how the market economy works. It is common knowledge that all profit theories are defective: “A satisfactory theory of profits is still elusive.”#6

This means, to this day neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian cargo cultic sect can tell what macroeconomic profit is.#7 Hence, they fail to capture the essence of the market economy. This is not exactly a noteworthy scientific achievement of the economics profession.#8

Does the world expect from economists to find out how people behave? No, this is the very job of psychology, sociology, anthropology, etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, psychologist, biologist, or sociologist will ever try to figure this out.

Have economists done their proper job? No. Do economists know what profit is? No. Does behavioral economics help to find out what profit is? No.

It is not the task of economists to dabble in the so-called social sciences. The subject matter of economics is the economy. Economics is a system science and has to be based on macrofoundations. Economists are still caught in a cargo cultic paradigm. They do not deserve any prizes but to be thrown out of science.

Egmont Kakarot-Handtke

#1 Economics: 200+ years of scientific incompetence and fraudhttps://axecorg.blogspot.de/2017/06/economics-200-years-of-scientific.html

#2 What is so great about cargo cult science? or, How economists learned to stop worrying about failurehttps://axecorg.blogspot.de/2017/05/what-is-so-great-about-cargo-cult.html

Ah Egmpmt/ I shall check out the Hudik piece in JEM, but otherwise, everything in this post has been said by you multiple times, here with almost identical wording. As you do not say what Hudik's argument is, there is nothing new here in your text, nothing. Just same old, same old, which has been refuted many times here, and I am not going to waste anybody's time doing any of it again.

If somehow Hudik says something worth discussion (which you did not do), I might comment on it. Otherwise, this will be it from me in response to this comment by you (or any further one you might put up on this thread, as there is nothing new in this already refuted babbling).

Economics is NOT about human behavior but about the behavior of the economic system. The lethal blunder of economics is methodological individualism which comes in many psycho-sociological flavors and constitutes as the axiom of constrained optimization the core of Orthodoxy.

Science is well-defined since 2000+ years but economists somehow did not get it: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Only certain knowledge (= materially/formally consistent) can be admitted to the corpus of science. And here is the crux of the so-called social sciences: “By having a vague theory it is possible to get either result. … It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman)

So, to begin with, economics cannot be built upon a behavioral axiom like constrained optimization or any other psycho-sociological premise.

This is the current state of economics: PsySoc-economists do NOT know how the economy works. Economists have not realized until this day that they are in a research program that has already been dead in the cradle: “Indeed, Alexander Rosenberg maintains that there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman)

What have economists contributed to the trash heap of the so-called social sciences? Utility maximization, bounded rationality, game theory, and so on until Behavioral Economics.

What the blathering dilettantes of PsySoc and soapbox economics cannot and do not grasp is: if it isn’t macro-axiomatized, it isn’t economics. And because of this proven incompetence, they have to be expelled from the sciences.